Credit Policy Part 3

So far in formulating a credit policy we have looked at the following:

  • Developing a policy to increase sales, not reduce them
  • Determining who are your low risk, medium risk and high risk customers
  • Setting up the account for these three groups of customers and stating who receives automatic credit, who needs to be checked, who needs to pay a deposit and who needs a formal contract prepared by a competent solicitor
  • When and to whom you need to withdraw credit and threaten to do so<--break->

The final step is to decide what to do when your customer refuses to pay. Your credit policy must clearly state the options available to you. Here are three:

  1. Write off the account.
  2. Take legal action yourself.
  3. Take legal action through a third party.

Writing off an account should not be done lightly. A small account is not a good enough reason to write off the account. I have profitably collected accounts through the local court system for less than $300. However, for small accounts, you have to be confident of winning because it can cost you over $200 to collect your debt through the Local or Magistrates Court. In New South Wales and in most states of Australia these legal costs can be passed on to your customer. For details of the court procedures in each state and territory of Australia and in New Zealand, you can get a copy of my book, Debt Collection Made Easy, at

There are some good reasons to write off an account. Firstly, if you have set up the account incorrectly in the first place and you do not know which entity to sue, then treat this as a learning experience for next time. When offering credit, always assume that you will have to take this person or company to court. This will make sure you have the account set up properly in the first place. For an individual, you need the full name and address. For a company, you need the company name and address or ABN number. Companies are registered with the Australian Securities and Investment Commission so details like directors’ names and addresses and the registered address of the company can be determined later.

Secondly, write off the account if your customer has no money or assets. Thirdly, write off the account if you cannot find your customer.

I recommend taking legal action yourself. It is not difficult and you will find that the local courts will help you lodge your claim. You do not need detailed paper work. You just need proof of your claim. Generally, a copy of the tax invoice is sufficient.

If you do not wish to take legal action yourself, you can pay someone else to do it for you. You can hire numerous mercantile agents or debt collection agencies to do this job for you. However, be warned. Firstly, they will often lodge letters of demand. These are not binding legal documents. Mercantile agents have no authority if their letter of demand is rejected. However, these agents do carry a perceived authority and can be effective in collecting some long overdue money. If your customer has disappeared or has no money, then the mercantile agents will not perform miracles for you. Do not waste money in chasing customers who are unlikely to pay. Your credit policy must state clearly if and when to use mercantile agents.

For very large debts, say over $50,000, it is wise to seek the services of a solicitor. Generally, claims of this size are not heard in the Local Courts or Magistrates Courts.

There is one thing I have deliberately omitted in a credit policy and that is the issue of early payment discounts. These were popular many years ago but are not common today and rightly so. The problem is that your customer may claim an early payment discount even when they pay late. Then you have the additional problem of collecting a small balance. Secondly, the introduction of the GST in 2000, has meant that you are required to send your customer an adjustment note for an underpayment so both you and your customer can reconcile your GST on the Business Activity Statement.

If you need an incentive to collect money from your customers, a gift or reward is preferable to a discount.

Next time I will look at collection procedures from the time the invoice is prepared until the money is collected.

Ref: Small BIZ Tips Volume 3 Issue 6 by Ian Renton March 2010

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